Farmers are traditionally in business for the long haul. Indeed, a significant proportion of all farm properties have been passed down through several generations with the value of the farmhouse often considered incidental to the total farm value. However, despite the current slowdown in house prices, property values have risen dramatically over recent years, such that the farmhouse itself may be a significantly valuable asset in its own right.
Unfortunately, the upward movement in asset values brings with it Inheritance Tax (IHT) implications. IHT is payable on estates with a value exceeding £325,000 at the rate of 40% on the excess. Farm businesses can benefit from Agricultural Property Relief (APR). Provided structured carefully, 100% relief is available to fully exempt both the farm and the farmhouse from IHT – a very valuable form of relief indeed. But with the general increase in land and property prices, HMRC are now much more likely to scrutinise claims for APR – on the farmhouse in particular.
To qualify for APR, the farmhouse must be of a ‘character appropriate’ to the overall farm holding. In essence, the house should be occupied by a farmer in day to day control of the farming activities - and that the house itself is of a size proportionate to the scale of the farming operation. In other words, cases where the occupier is a part-time or hobby farmer or where there is a relatively large farmhouse on a small holding are more likely to receive scrutiny. The fact that land is perhaps farmed under a contracting arrangement should not of itself jeopardise a claim for APR on the farmhouse – but care must be exercised to ensure that the arrangement entered into is properly constituted. It is also evident that HMRC are more likely to query an APR claim on the farmhouse where the day to day management of the farm activities is conducted from a separate farm office, rather than the farmhouse itself.
The recent case of Golding v HMRC is of interest. In it the taxman sought to deny relief on the farmhouse on the basis that the financial viability of the farming operation was insufficient to sustain the house. This was a case based on a relatively small holding in which the farmer had been in occupation for over 65 years although in more recent times the level of activity had decreased. HMRC lost on the basis that financial viability is not the only determining factor in assessing the character appropriate test for farmhouses but rather a variety of different physical and other factors need to be taken into account including the scale of the farmhouse in relation to farming activities and the historic context of the holding.
So far so good. Obtaining satisfaction that the farmhouse qualifies for APR is unfortunately not the whole story. More recently HMRC have sought to mount a new line of attack on farmhouses. Agricultural Property Relief (APR) - as the name suggests – applies only against the agricultural value of the land and buildings including the farmhouse. As a result, the taxman may argue that it is only the value of the property which equates with the effect as if there were a covenant on the property prohibiting its use otherwise than for agricultural purposes, which is covered by APR. In the context of the farmhouse, this may be a value significantly less than the open market value. In a number of recent cases, the Inland Revenue have sought to limit APR to only 70% of the market value. This ‘standard discount’ should be resisted particularly where the farmhouse is clearly the centre of farming operations, is of a relatively moderate size, or is held together with a reasonably large acreage.
A further challenge to APR on the farmhouse may arise if the property has not been occupied for the purposes of agriculture throughout the period of two years prior to date of death. In particular, this can inadvertently affect farmers who for health reasons for example move into nursing home accommodation. In the context of farm partnerships, provided it can be shown that the farmhouse still remains the hub of the farming operations and the farmer still holds an interest in the farm business, then all may not be lost. Indeed, if it can be argued that the move is temporary, then a claim for APR on the farmhouse can still prove successful.
Rising property values mean that the ability to access APR on the farmhouse is more important than ever. However, with some prudent planning in advance of the inevitable, the aim must be to ensure that the claim to APR is not compromised, allowing greater value to pass down to the family.
By Ewan Wallace, Private Client Tax Partner at Johnston Carmichael.
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